Debt fight nears end; downgrade threat remains

By IBT Staff Reporter On 08/02/11 AT 11:16 AM

Congress was poised on Tuesday to grant final approval to a deficit-cutting package that will avert a debt default but may not be enough to prevent a damaging downgrade of the top-notch American credit rating.

Just hours before the Treasury's authority to borrow funds runs out, the Senate and President Barack Obama were expected to seal the deal to lift the government's $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.

The bill overcame its biggest hurdle late on Monday when the Republican-led House of Representatives passed the $2.1 trillion deficit-reduction plan despite resistance from recalcitrant Tea Party conservatives and disappointed liberal Democrats.

There was little suspense about the outcome of the vote in the Democratic-controlled Senate set for noon EDT, and Obama -- due to deliver a statement shortly afterward

-- was expected to quickly sign it into law without a White House ceremony.

That would mark the end of an acrimonious partisan stalemate in Washington that threatened chaos in global financial markets and dented America's stature as the world's economic superpower.

But deep uncertainty remained over whether the budget deal goes far enough in reining in deficits to satisfy major ratings agencies, which have threatened to downgrade the United States' AAA credit rating. Such a move would raise borrowing costs and act as another drag on the stumbling economy.

Treasury Secretary Timothy Geithner said he expected the ratings agencies to take a careful look at the situation but that he was not sure whether the United States would be spared from a downgrade.

I don't know. It's hard to tell, he told ABC News.

Initial relief in financial markets over an end to the gridlock quickly turned to concern on Tuesday about risk of a U.S. ratings cut as well concerns based on recent economic data that growth could remain subdued. The major U.S. stock exchanges were all down about half a percent in early trading, and gold prices hit a new record high.

The plan calls for $2.1 trillion in spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.

That appears to fall short of rating agency Standard & Poor's assertion that $4 trillion in deficit-reduction measures would be needed avoid a downgrade by showing that Washington was putting the country's finances in order.

The resolution to the debt ceiling does remove one cloud of uncertainty but it does not change the economic reality, said Greg McBride, senior financial analyst at Bankrate.com.

It's going to take years to come out of this. We're sitting in the terminal waiting for the economy to take flight and instead it's just being delayed month after month after month.

Angel Gurria, head of the Organization for Economic Cooperation and Development club of industrialized nations, said the last-minute U.S. debt deal brought a general sense of relief but further negotiations involving much bigger cuts will be needed to resolve the U.S. debt problem.

There will have to be very forward-looking decisions taken on that matter, Gurria said on a visit to Athens.

The compromise deal was agreed after weeks of angry debate and brinkmanship between Democrats and Republicans.

With unemployment above 9 percent and the economy barely growing so far this year, Americans have become increasingly angry over the partisan attacks and refusals to compromise.

They may soon face the next round of noisy sparring over ideologically fraught tax and spending policies.

The new debt committee is due to make its recommendations by the end of November.